Touro University International1 Supply and Demand Issues Supply and demand are the starting point of all economic analysis The essence of choice is being able to balance the two

Touro University International2 S U P P L Y The different quantities that a producer or producers will make available to the market at different prices over a given period of time.

Touro University International3 LAW OF SUPPLY As price increases, producers are willing to produce and sell more As price decreases, producers are willing to produce and sell less Price and Quantity Supplied are directly related

Touro University International4 Supply Table PriceQuantity $ $ $ $ $ Widgets Per Week

Touro University International5 Supply Graph

Touro University International6 Producer Costs Fixed Costs : Costs that don't change as production levels change Ex: Rent, Insurance, Loan Payments, Taxes Variable Costs: Costs that increase and decrease with changes in the production levels Ex: Labor costs, Materials, Utilities Total Costs = Fixed Costs + Variable Costs

Touro University International7 Changes in Supply Production Costs Ex: Materials, Labor, Technology, Taxes Number of Producers in the Market Profitability of other production options Expectation of future market price Supply in the market will change if there is a change in:

Touro University International8 Increase in Supply Q P P1 Q1 S1 Q2 S2

Touro University International9 DEMAND The various quantities that a person or group is willing to buy at various prices

Touro University International10 Law of Demand As prices increase, the quantity people are willing to buy decreases As prices decrease, the quantity people are willing to buy increases Indirect price/quantity relationship

Touro University International11 DEMAND TABLE (Coca-Colas per week) PriceQuantity $.2520 $.5010 $.757 $1.00 5

Touro University International12 Demand Graph

Touro University International13 REASONS FOR DEMAND Income Effect (Price Effect) When price rises, a consumer cannot afford to buy as much. But, when price declines, a consumer can afford to buy more. Price changes affect “purchasing power” of income

Touro University International14 REASONS FOR DEMAND Substitution Effect When prices increase on one product, consumers will buy a substitute product instead. But when prices decrease on a product, consumers will switch to that product from other substitutes. When prices increase on one product, consumers will buy a substitute product instead. But when prices decrease on a product, consumers will switch to that product from other substitutes. Substitutes are products that can be used in place of each other. Complements are products that are used together

Touro University International15 REASONS FOR DEMAND Law of Diminishing Marginal Utility As we have more and more units of a product, the satisfaction we get from each additional unit decreases. Marginal = additional, next, or last Utility = satisfaction

Touro University International16 Changes in Demand If Demand changes, then people want more or less of the product even when the price remains constant There are several reasons why Demand might change…...

Touro University International17 Changes in Demand A change in people’s income... When people have more money, they buy more of everything, and when they have less, they buy less.

Touro University International18 Change in Demand People’s tastes and preferences change….. Advertising changes people’s attitudes, desires, etc. Styles change, fads come and go.

Touro University International19 Change in Demand Situation and needs change... Get a new job? You might need different clothes. Move? A baby on the way? A new product get invented?

Touro University International20 Changes in Demand There’s a change in the number of consumers in the market... When there are more consumers, Demand goes up, and visa-versa

Touro University International21 Changes in Demand Expectations of future price... If we expect the price to go down soon, we will have reduced Demand now, and visa-versa

Touro University International22 Changes in Demand The prices of substitutes or complements change…. If apples go up in price, the Demand for pears might increase because people will substitute pears for apples.

Touro University International23 Increase in Demand D1 Q P P1 Q1 D2 Q2

Touro University International24 Decrease in Demand Q2 D2 Q P P1 Q1 D1

Touro University International25 CHANGES IN DEMAND Demand will change if there are changes in: Income, Wealth, Credit Personal Tastes and Preferences Situation Number of Consumers in the Market Expectation of Future Price The prices of Complements or Substitutes

Touro University International26 Putting Demand and Supply Together Equilibrium The situation when quantity supplied equals quantity demanded at a particular price

Touro University International27 Putting Demand and Supply Together Shortages The situation when quantity demanded is greater than quantity supplied Exists at any price below the equilibrium price Is not the same as scarcity

Touro University International28 Putting Demand and Supply Together Surpluses The situation when quantity supplied is greater than quantity demanded Exists at any price above the equilibrium price

Touro University International29 Summary The law of demand says that prices and quantity demanded are inversely related. Relative prices must be distinguished from money, since people respond to changes in relative prices.

Touro University International30 Summary A change in quantity demanded versus a change in demand A change in quantity demanded is a movement along a demand curve A change in demand is a shift of the demand curve The law of supply states that price and quantity supplied are directly related.

Touro University International31 Summary A change in quantity supplied versus a change in supply A change in quantity supplied is a movement along a supply curve A change in supply is a shift of the supply curve

Touro University International32 Summary Determining market price and equilibrium quantity The demand and supply curves intersect at the equilibrium point. Shortages exist when the price of a good is below the market price. Surpluses exist if the price of the good is greater than the market price.